1 BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION
2 450 N STREET
3 SACRAMENTO, CALIFORNIA
4
5
6
7
8 REPORTER'S TRANSCRIPT
9 MARCH 20, 2012
10
11 SALES AND USE TAX APPEAL HEARING
12 APPEAL OF
13 DAVID A. BARTEL
14 NO. 518470 (KH)
15 AGAINST PROPOSED ASSESSMENT OF
16 SALES AND USE TAX
17
18
19
20
21
22
23
24
25 Reported by: Juli Price Jackson
26 CSR No. 5214
27
28
1
1 P R E S E N T
2 For the Board Jerome E. Horton
of Equalization: Chairman
3
4 Michelle Steel
Vice-Chairwoman
5
6 Betty T. Yee
Member
7
8 George Runner
Member
9
10 Marcy Jo Mandel
Appearing for John
11 Chiang, State Controller
(per Government Code
12 Section 7.9)
13
Diane G. Olson,
14 Chief
Board Proceedings
15 Division
16 For Board of David Levine
Equalization Staff: Staff Counsel
17
18 For Department: Andrew Kwee
Tax Counsel
19
Robert Tucker
20 Legal Department
21
Kevin Hanks
22 Chief, Headquarters
Operations Division
23
24 For Petitioner: David A. Bartel
Taxpayer
25
Abe Golomb
26 Representative
27 R. Todd Luoma
Attorney
28
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2
1 450 N STREET
2 SACRAMENTO, CALIFORNIA
3 MARCH 20, 2012
4 ---oOo---
5 MR. HORTON: Ms. Olson?
6 MS. OLSON: Our next item is C1, David A.
7 Bartel.
8 Please come come forward.
9 MR. HORTON: Mr. Levine, would you please
10 introduce the issues in this petition?
11 MR. LEVINE: Good afternoon, Chairman Horton,
12 Members, David Levine for the Appeals Division.
13 The issues in this petition of David Bartel are
14 whether the Petitioner's personally liable for the tax
15 debts of Tracy Chevrolet under Section 6829 and whether
16 the payment from escrow, which was applied to the
17 corporation's liability for the third quarter 2007
18 should have instead been applied to the liability for
19 the fourth quarter 2007.
20 I note also that Petitioner's not submitted a
21 request for relief of the penalties that were imposed on
22 the corporation.
23 MR. HORTON: Okay. Is there a reason you have
24 not submitted a request?
25 MR. GOLOMB: Yes.
26 MR. HORTON: Okay.
27 MR. GOLOMB: We don't believe that this person
28 is personally liable.
3
1 And in discussing that with Mr. Bartel, we
2 decided not to submit a request.
3 MR. HORTON: Okay. You have ten minutes to
4 make your presentation. We would ask that you commence
5 with your introductions for the record.
6 MR. GOLOMB: Okay. I'm Abe Golomb with Sales
7 Tax Reduction Specialists.
8 MR. LUOMA: I'm Todd Luoma, attorney at law.
9 MR. HORTON: Okay.
10 MR. GOLOMB: We have a fairly complicated case
11 and we bifurcated our presentation. I will briefly
12 discuss the pertinent facts, then Todd Luoma will
13 explain how the law and court cases apply to those
14 facts. And then follow up in our rebuttal if we don't
15 cover everything in our presentation.
16 Basically, David Bartel and another individual
17 started Tracy Chevrolet, Inc. The other individual
18 became very ill and Mr. Bartel purchased his interest.
19 After a period of time, he sold 25 percent of his
20 interest -- his 100 percent interest -- to Stephen
21 Kraut, who happened to be an employee of the dealership.
22 After another subsequent period of time he sold
23 Mr. Kraut another 25 percent. So, both Mr. Kraut and
24 Mr. Bartel were 50 -- equal shareholders in the
25 corporation.
26 In 2001, actually sometime in 2001, Mr. Bartel
27 withdrew from active day-to-day involvement in the
28 corporation. Subsequent to that, he rarely came to the
4
1 business. Mr. Stephen Kraut was the -- took over
2 day-to-day operations, made all management and financial
3 decisions from that -- from that time forward.
4 Mr. Bartel, as a 50 percent shareholder,
5 received monthly financial statements from the
6 corporation -- or from the dealership showing the
7 financial situation in the dealership. None of those
8 financial statements ever indicated there was a problem.
9 In April 2005, First Hawaiian Bank purchased
10 the flooring loan agreement from Citibank. And in
11 October 2006 they renewed the flooring agreement and
12 increased it from $11 million dollars to $13 million.
13 When they did that, they never reviewed Tracy
14 Chevrolet's records. They just went ahead and increased
15 it at Mr. Kraut's request. In about October 2007 the
16 dealership reached the maximum $13 million flooring loan
17 agreement and tried to get an increase.
18 First Hawaiian Bank refused. And then in -- at
19 the end of October, or towards the end of October 2007,
20 reviewed Tracy Chevrolet's records for the first time
21 and discovered that, in the parlance, that they were out
22 of trust. In essence, First Hawaiian Bank had loaned
23 more money to Tracy Chevrolet than Tracy Chevrolet had
24 sold cars for.
25 First Hawaiian Bank then sent a letter to
26 Mr. Bartel and also to Mr. Kraut explaining that there
27 was a problem based on their review of the records.
28 That letter went out sometime in early November 2007.
5
1 In late November 2007, Mr. Kraut, Mr. Bartel and a
2 representative of First Hawaiian Bank met. During that
3 meeting, Mr. Kraut freely admitted that he had been
4 embezzling money from the dealership and that this
5 embezzlement had been going on for a number of years and
6 that he had falsified the financial information that he
7 was providing both to Mr. Bartel and to First Hawaiian
8 Bank.
9 At that point in time, First Hawaiian Bank
10 realized that they would probably not get paid the
11 $13 million that was owed them from the dealership.
12 They then accelerated the payment requirement of that
13 loan. And on December 7th, took over the operation.
14 On December 6th, Mr. Kraut left. Also on
15 December 7th Mr. Bartel came in to try to help resolve
16 the problem. Now on December 7th there were a number of
17 car deals that were in process that hadn't yet been
18 finished. Mr. Bartel went ahead and finished those
19 deals and reported and paid the tax due on those deals.
20 The dealership remained open for another 13 days. It
21 closed -- or I should say the dealership ceased all
22 sales activity on December 20th, 2007.
23 Now the bank was very interested in recovering
24 as much money as they could from the dealership. The
25 only way to do this is to have the franchise be sold and
26 to also sell the remaining inventory. Now, if they had
27 closed the dealership, the franchise would have
28 automatically reverted to General Motors. So, they had
6
1 to keep that dealership open. And they did.
2 Ultimately, they sold the business to the
3 buyer -- to a new buyer. The new buyer, as one of his
4 requirements, asked for a tax clearance from the Board
5 of Equalization. The Sacramento District Compliance
6 staff negotiated with the bank and -- for the issuance
7 of the tax clearance, requested a payment of $200,000,
8 which was made from escrow in March 2008.
9 The balance of the monies that were received
10 from the sale of the business all went to First Hawaiian
11 Bank. Mr. Bartel received no monies from any of the
12 sales proceeds. He did this to try to make things
13 right.
14 Now when the Board received the $200,000, they
15 continued to send all correspondence to the former
16 business address of Tracy Chevrolet in Tracy. Now, the
17 new buyers decided to keep the dba Tracy Chevrolet.
18 They were receiving all this correspondence. Mr. Bartel
19 never received any of it.
20 I am now going to turn over the presentation to
21 Mr. Luoma.
22 MR. HORTON: Thank you. Welcome, sir.
23 MR. LUOMA: Mr. Chairman, Members of the Board,
24 this case is a responsible person case. Generally every
25 state in the federal government has a responsible person
26 type of statute to be able to, essentially, pierce the
27 corporate veil, to be able to go after a person who is
28 responsible in some way for some sort of tax liability
7
1 that was not paid by the entity. So, they're looking
2 for those responsible persons.
3 In California the Board of Equalization has a
4 responsible person statute. The Employment Development
5 Department has a responsible person statute. The
6 federal government has a responsible person statute.
7 And virtually all of these responsible person statutes
8 are identical. What they are looking for is to
9 determine who is the party that's responsible for
10 failing to pay the tax and did that person knowingly,
11 willfully fail to pay that tax?
12 And for that person, for responsibility, what
13 the statutes look for is what is -- you know, what is
14 the the status of the person? What were the duties of
15 the person? And what kind of control did they exert?
16 And as far as willfulness, the statutes go to
17 did the person, when they knew of the liability, did
18 they prefer other creditors? So, that's the basic
19 structure of the statute.
20 In California there are very few cases, either
21 in the Employment Development Department -- although
22 there are some decisions in the California Unemployment
23 Insurance Appeals Board and in the Board of Equalization
24 that really discussed this.
25 The federal responsible person statute,
26 however, has a significant case law development of what
27 it means to be a responsible person who willfully failed
28 to -- to pay the tax.
8
1 In California, the Unemployment Insurance
2 Appeals Board has accepted the federal law as a basis
3 for determining who's responsible and did they act
4 willfully.
5 And I urge that the Board of Equalization, as
6 we mentioned in our brief, that the Board also adopt the
7 federal law in determining who the responsible people
8 are in situations like this and whether or not they
9 acted willfully.
10 In this case we have a fact pattern that is
11 very close to a decision that was made in the United
12 States Supreme Court, Slodov versus United States. In
13 fact, it's virtually identical. And I've attached a
14 copy of the Slodov decision that went in with our last
15 brief.
16 Essentially, the responsible person enters into
17 a business part way through a quarter. And in this case
18 that's what happened with Mr. Bartel. He was not
19 involved early on. He may have been a part owner, but
20 he did not become involved until December 7th, which is
21 partially through the fourth quarter.
22 The creditor in this case, First Hawaiian Bank,
23 and in the Slodov case, had a security agreement that
24 locked up all assets, including deposit accounts and all
25 hard assets as well as accounts receivable. And that
26 was the case here and that was found in the Decision and
27 Recommendation at page 8 by the Appeals function.
28 Also the responsible person continues the
9
1 business activity, as did Mr. Slodov in the Supreme
2 Court case, as did Mr. Bartel. The purpose for
3 Mr. Bartel, as Mr. Golomb has indicated, was to be able
4 to sell the franchise, the GM franchise, the Chevy
5 franchise, so that it could be used -- the funds could
6 be used to pay all debts, including to the Board of
7 Equalization.
8 MS. OLSON: Time has expired.
9 MR. HORTON: Sir, can you conclude in a few
10 minutes -- well, in a minute, sorry.
11 MR. LUOMA: Yes, I will.
12 In any event, in the Slodov case -- this is
13 virtually exactly the case that you have here. In fact,
14 the Appeals attorney who wrote the Decision and
15 Recommendation started down that path, made the
16 determination that -- that Mr. Bartel was not liable for
17 the third quarter, even the though the Department had
18 originally found him liable for the third quarter, but
19 did not complete the journey down that path in dividing
20 that liability at December 7th through December 20th,
21 when he was a responsible person. And that liability he
22 paid.
23 And on the basis is of the Slodov case,
24 Mr. Bartel was not liable because he did not act
25 willfully, as the Slodov Supreme Court decision found.
26 MR. HORTON: Thank you.
27 Department has ten minutes to make their
28 presentation. Please commence with your introductions.
10
1 MR. KWEE: Good afternoon, Chairman Horton.
2 MR. HORTON: Good afternoon.
3 MR. KWEE: Members of the Board, I am Andrew
4 Kwee on behalf of the Board's Legal Department. And
5 with me today are Bob Tucker, also from the Legal
6 Department and Kevin Hanks from the Sales and Use Tax
7 Department and we'll be representing staff.
8 Basically, Petitioner is a responsible person
9 within the meaning of Section 6829. Of the four
10 elements required to impose responsible person
11 liability, Petitioner disputes that he was responsible
12 and that he was willful.
13 So, Petitioner was responsible for the sales
14 and use tax matters because the facts establish that he
15 has signed the sales and use tax return at issue. As
16 noted in Exhibit 1 to the D & R, Petitioner reported to
17 the press that he took on the role of Managing Partner
18 at the end of November 2007. It's not disputed that the
19 business partner, Mr. Kraut, left the business in early
20 December 2007. And Petitioner had also signed the
21 application for sales and use tax permit as Vice
22 President.
23 So, regarding the second element, willfulness,
24 willfulness is basically established when a person -- a
25 responsible person has knowledge that the taxes are not
26 being paid, the authority to pay the taxes or to cause
27 them to be paid and payments are made or caused to be
28 made to others while the taxes are not being paid.
11
1 And regarding willfulness, in this particular
2 case the Petitioner was an authorized signer in the
3 corporate bank account. Also employees responsible
4 for -- former employee, Sara Call, who is responsible
5 for the accounts payable and payroll, submitted a
6 statement signed under penalty of perjury, stating that
7 the Petitioner had instructed her and other employees
8 that no checks or payments would be signed or sent out
9 unless they were to be approved by Petitioner. And this
10 was corroborated by statements by other employees.
11 And, finally, payments exceeding $700,000 were
12 made during the fourth quarter of 2007 and the first
13 quarter of 2008. And Petitioner had been signing checks
14 on these payments up through -- and continuing through
15 the close of escrow. These payments were made to pay
16 the usual expenses associated with keeping the business
17 running and operated -- and operating until it was sold
18 on March 28th, 2008. And these payments were made, for
19 example, for rent, utilities, wages, electricity, gas
20 and to pay various other creditors, such as the CPA.
21 Regarding the Petitioner's other point about
22 applying the federal law or federal case law to
23 Section 6829, basically the Regulation 1705 -- 1702.5 in
24 the Revenue and Taxation Code provide for the proper
25 application of the sales and use tax law, which is at
26 issue here. The interpretation by federal courts of the
27 Internal Revenue Code are not controlling. And they're
28 also not directly on point. The Internal Revenue Code
12
1 cited at issue imposes a penalty for willfully failing
2 to collect or collecting but willfully failing to pay
3 certain employment withholding taxes. These cases are
4 not applicable because the character of the taxes
5 covered by the Internal Revenue Code are different from
6 California sales and use tax. And they're actually
7 stated, per statute, to be held in trust for the United
8 States government.
9 Finally, we'd also note that Appeals Division,
10 as noted in the D & R, they did contact the bank manager
11 that had met with the Petitioner and the bank manager
12 confirmed that they did not exercise control over the
13 finances and that Petitioner did not run by what
14 payments would be made to the bank.
15 So, with that being said, we concur with the
16 Appeals Division's recommendation.
17 MR. HORTON: Thank you very much.
18 On rebuttal, please?
19 MR. LUOMA: Yes, the question on the -- the
20 writing the checks to pay the various expenses that
21 incurred after December 7th, the funds that are at
22 issue -- and this where the Slodov case goes into a
23 great point -- is that if there were unencumbered funds
24 available, then the use by a responsible person to
25 prefer other creditors, those unencumbered funds would
26 then be appropriately -- you'd find the person acting
27 willfully.
28 But in this case and in the Slodov case, there
13
1 were no unencumbered funds. The financing agreement
2 that was entered into that's referred to in the Decision
3 and Recommendation, and which was part of the basis for
4 the Appeals Division's determination that the Appellant
5 was not liable for the third quarter of 2007, there were
6 no unencumbered funds. Everything was locked up by the
7 First Hawaiian Bank.
8 Indeed, the Board had to negotiate with First
9 Hawaiian Bank to get the $200,000 out. They could have
10 requested more out of escrow on the sale of the -- but
11 they didn't do it. They negotiated with the bank
12 because the bank had a superior position. And that's
13 why only 200,000 was paid out from -- from escrow.
14 MR. GOLOMB: One other point is for the fourth
15 quarter, the liability at issue occurred for sales of
16 vehicles from October 1st through December 6th. Those
17 funds that are at issue here were embezzled by
18 Mr. Kraut. When Mr. Bartel walked in the door, there
19 was very little funds in the account.
20 Now, to run this business, the minimum fixed
21 overheard monthly was a quarter of a million dollars.
22 They couldn't stay alive more than a few days just to
23 wrap up the few deals that were outstanding.
24 The other key point is the bank admitted for
25 every day from December 7th on, 'til the business was
26 sold, they had one person there. And many times they
27 had two of their employees there sitting and watching
28 everything going on. They weren't there just warming
14
1 chairs, they were insuring that their position and their
2 assets were being protected. And the bank admitted to
3 this. The bank is not stupid. They're not going to
4 admit to the phone -- in a phone call from the tax
5 counsel that they ran the business.
6 But they did run the business. They told
7 Mr. Bartel what to do. Here we have a situation where
8 Mr. Bartel tried to do the best thing. And the Board is
9 taking the position that no good deed goes unpunished.
10 That is not the intent of the law.
11 Also he tried to have the $200,000 payment that
12 was applied to the third quarter, moved to the fourth
13 quarter. He was willing to pay the difference and walk
14 away, even though he has no -- he doesn't feel he has
15 any liability. The Board staff moved the money and then
16 subsequently moved it back.
17 I have, over the years, been representing many
18 taxpayers and I've had the Board staff move money
19 constantly, even years later, without any problem. Yet
20 in this case, there is a problem. So, I don't see what
21 the problem is.
22 Mr. Bartel has tried to resolve this case
23 satisfactorily. And he has made a reasonable offer that
24 has been refused by the staff.
25 Thank you.
26 MR. HORTON: Thank you very much.
27 Discussion, Members? Member Mandel.
28 MS. MANDEL: Well, I guess there's sort of two
15
1 points that I'd like to hear a little from staff or,
2 perhaps, one of them from Mr. Levine.
3 The one is this idea that of -- from December 7
4 on that when Mr. Bartel came into -- back into the
5 dealership and he's -- the idea of what funds -- what
6 unencumbered funds did the dealership have at that time?
7 And if there were none, that any -- that goes to the
8 sort of willfulness, if maybe that could be addressed?
9 But I did have a question for the taxpayers on
10 the application of the escrow payment. Was there a
11 written request by the Petitioner on behalf of Tracy
12 Chevrolet of how to apply -- because this is a payment
13 to Tracy Chevrolet? The escrow is to Tracy Chevrolet?
14 Was there a written request that -- around the time of
15 the escrow or did that come later?
16 Can you -- I don't have a copy of it.
17 MR. GOLOMB: Let me explain that. The $200,000
18 payment was a payment from escrow for the sale of the
19 franchise and the inventory.
20 MS. MANDEL: And who -- if -- leaving aside the
21 bank, you know --
22 MR. GOLOMB: Yes.
23 MS. MANDEL: -- because the bank's going to get
24 all the money.
25 MR. GOLOMB: Gets the balance, yes.
26 MS. MANDEL: But -- but -- who -- who would
27 have gotten that -- who would the escrow been paid out
28 to? Was that Tracy Chevrolet's money or was that
16
1 Mr. Bartel's money, leaving aside the bank?
2 MR. GOLOMB: As I understand it, it was Tracy
3 Chevrolet's money 'cause they sold the franchise --
4 MS. MANDEL: Tracy Chevrolet?
5 MR. GOLOMB: -- and the inventory.
6 MS. MANDEL: Okay.
7 MR. GOLOMB: Tracy Chevrolet, Inc.
8 MS. MANDEL: Okay. So, then can you explain
9 then who made the request and how was the request made?
10 MR. GOLOMB: Okay, I'll explain that.
11 MS. MANDEL: Okay. Maybe staff has a copy of
12 the written request and then I can just --
13 MR. GOLOMB: We do -- there is a copy and it's
14 floating around, but I can get it to you after the
15 hearing.
16 Only -- only after we became aware -- after
17 Mr. Bartel became aware that the Board had applied that
18 $200,000 to the third quarter and we became aware of
19 that when we received the D & R.
20 And as I explained to you, all mail continued
21 to be mailed to their former address and the new owners
22 also were called Tracy Chevrolet. They received the
23 mail. He never received anything.
24 Once he became aware that the $200,000 was
25 applied to the third quarter, he wrote a letter to the
26 Board requesting that it be reapplied to the fourth
27 quarter. And they did that.
28 MS. MANDEL: Okay.
17
1 MR. GOLOMB: And then they took that money and
2 moved it back again to the third quarter.
3 MS. MANDEL: Okay. And Tracy Chevrolet --
4 Tracy Chevrolet took over -- the current Tracy
5 Chevrolet, they took over the business?
6 MR. GOLOMB: Yeah, they -- that's the dba. I
7 don't know what their corporate name is.
8 MS. MANDEL: Okay. So, they might not respond
9 because they might -- they might --
10 MS. STEEL: They just probably threw the
11 letters away. They don't have anything to do with that.
12 MS. MANDEL: I don't know if they're in a
13 successor position or not.
14 MR. GOLOMB: No, they just bought the business,
15 they got the tax clearance, they're -- you know, they're
16 home free.
17 What we're talking about -- and if the money is
18 moved, there's approximately 30,000 remaining.
19 MS. MANDEL: Right, right, I understand the
20 benefit to your client of moving the money.
21 I was just trying to figure out if -- what he
22 sent in under all of the sort of facts and circumstances
23 could be said to have been effectively a request by
24 Tracy Chevrolet?
25 MR. GOLOMB: He signed it as the Vice President
26 of Tracy Chevrolet.
27 MS. MANDEL: Yeah.
28 MR. GOLOMB: He was the Vice President.
18
1 MS. MANDEL: When -- okay.
2 Perhaps -- maybe I need to look for some -- do
3 you understand what I'm --
4 MR. LEVINE: Yes.
5 MS. MANDEL: -- the two things that I'm curious
6 about?
7 MR. LEVINE: I don't know what the Department's
8 policy is with moving money around and what happened in
9 this case.
10 It's my opinion that if the money is applied
11 properly, which includes when it's paid if the person
12 making the payment, here the taxpayer, directs payments,
13 we follow those instructions and, otherwise, as a
14 creditor, we can apply it any way we want.
15 And the way we want is expressed in our
16 manuals. If the Department has done, as instructed when
17 paid or, in lieu of that, in accordance with our
18 policies, I think it should stay there. And I certainly
19 don't think that whether it helps or hurts the taxpayer
20 it should be moved later.
21 If the Department has a policy of helping
22 taxpayers moving it around at their request that's still
23 a little bit different here because we're talking about
24 long after the company -- I assume it was long after the
25 company terminated. And the company didn't really even
26 exist any more.
27 I don't know the time frame that they're
28 talking about his direction, but the fact that he signed
19
1 it as Vice President, arguably, there's no one left to
2 speak for the taxpayer. So, someone should be able to.
3 But it was still a request to benefit themselves, not
4 the tax -- the corporation.
5 MS. MANDEL: Okay. And what about the -- were
6 there unencumbered funds December 6th?
7 Is that the sort of thing that -- for sales
8 tax?
9 MR. LEVINE: I don't know how much sales tax
10 was coming in. But certainly it would be my view that
11 they cannot encumber any sales tax reimbursement that's
12 collected in any way, now matter what their agreement
13 says.
14 MS. MANDEL: Okay. So, if they were making
15 sales after December 6th?
16 MR. LEVINE: Right.
17 MS. MANDEL: And getting sales tax?
18 MR. LEVINE: Right.
19 MS. MANDEL: Okay.
20 MR. LEVINE: As far as the rest of it, we
21 addressed it in the D & R, why we thought that it was --
22 MS. MANDEL: Anything that was collected and
23 absconded with or whatever, prior to December 7th?
24 So that when Bartel came in, it wasn't there?
25 MR. LEVINE: If it wasn't there, it wasn't
26 there.
27 MS. MANDEL: And I think --
28 MR. LEVINE: I'm just saying that if there was
20
1 an outstanding agreement that said everything that comes
2 in from the bank, if the agreement was, "Everything that
3 comes in is ours, you can't touch it," I'd say it
4 doesn't matter what the agreement says with respect to
5 sales tax reimbursement.
6 MS. MANDEL: Okay. But I think part of what
7 they're saying is that there were sales during the
8 fourth quarter through December 6th. Bartel walks in
9 the door on December 7th, maybe -- I don't know $100, I
10 don't know how much money was there, but I think what
11 they're saying is that just because he signs the return
12 then for the fourth quarter and because there may have
13 been payments of others -- whatever sales tax may have
14 been collected or should have been collected and paid
15 through December 6th, if there's zero and he walks in
16 the door on December 7th. And he has encumbered -- and
17 no subsequent sales, so you don't have that issue.
18 Is he -- is -- is it still willful, you know,
19 for all the stuff that happened before if there was no
20 money in the till when he walked in the door?
21 That's, I think, what they're saying, that
22 there was -- maybe there was some money, but,
23 essentially, if there's no money in the till when he
24 walks in the door, everything is encumbered, but for
25 subsequently collected sales tax, because we would say,
26 "Well, you can't encumber that," how -- where does the
27 willfulness come in for the money that's not there?
28 MR. LEVINE: If everything was literally
21
1 encumbered and you found that -- that the -- that Tracy
2 Chevrolet could not take that money and there was
3 nothing else, then I'd agree there's nothing else,
4 subject to one proviso -- and you've had this type of
5 situation before where -- where a responsible person --
6 and I don't remember the timeline, he was responsible
7 before and then he wasn't.
8 MS. MANDEL: Uh-huh.
9 MR. LEVINE: If someone signs a contract or is
10 a party to the contract, it puts money out of the hands,
11 then we expect a little bit more from that person than
12 from someone who walked in on the situation.
13 So, if he had nothing to do with the original
14 agreement --
15 MS. MANDEL: With the bank?
16 MR. LEVINE: -- right, that encumbered the
17 funds, and he walks in and there's literally nothing
18 that they can contractually take away from existing
19 money, then I'd -- I'd agree.
20 MS. MANDEL: Okay. And it sounded like where
21 Appeals went in the D & R was, "Well, we talked to the
22 guy from the bank and he said that he didn't tell him
23 what to do."
24 And, so, then I guess the theory is if there
25 was some money, even if it wasn't enough money to pay
26 everything from before December 6th, you'd still say he
27 was liable for the whole thing because it's not a
28 question of how much money is going through the business
22
1 at that point.
2 I'm just trying to figure out -- a lot of times
3 we have people who are there the entire time period and
4 this is a guy that -- he's not liable for the third
5 quarter, he's liable for the fourth quarter because he's
6 liable at the time of the prepayment return in December
7 and he's liable at the time -- he's responsible, I'm
8 sorry, responsible at the time of the return for the
9 fourth quarter, that's the responsible officer -- that's
10 the responsible party.
11 But then it's like, well, but for what? For
12 how much?
13 That's -- because when he -- you know, being
14 responsible doesn't necessarily mean you have the last
15 tag of willful.
16 MR. LEVINE: Right. There has to be funds
17 available to pay it. And if we're talking about an
18 ongoing business, we generally find for Appeals
19 Division, that's normally enough.
20 If we're talking about an ongoing business that
21 has funds coming in and out, even though the common
22 argument is, "We needed to use the funds to pay the
23 flooring and whatever to stay in business." And that
24 makes sense. But still, legally there is funds there.
25 MS. MANDEL: Okay. So, legally there's funds
26 there and even if the funds that are there never rise to
27 the level of -- it doesn't --
28 MR. LEVINE: There has to be -- the -- the
23
1 liability can't exceed the amount of funds that were
2 available to pay it.
3 So, if there was not enough funds to pay it,
4 they would be liable under 6829 to the extent of the
5 funds. It's the authority and ability to pay and the
6 ability is how much money is there?
7 MS. MANDEL: Okay. So, we do limit it to how
8 much money there -- is there?
9 MR. LEVINE: Right. We wouldn't hold someone
10 liable for more money than the corporation had.
11 MS. MANDEL: Okay. I'm -- now I'm just -- I'm
12 confused.
13 They look a little -- I don't know. Is that --
14 is that -- because I thought when the 6829 cases come
15 it's the company owed X dollars in tax, plus, you know,
16 then there's interest and then there's penalties and
17 whatever, and then -- then that all gets on the
18 shoulders of the responsible officer.
19 And I don't think I ever heard a discussion
20 about how much money did the company have that went
21 elsewhere that could have gone to this that didn't, so,
22 that's what we're going to limit the guy's liability to.
23 Is that what I --
24 MR. LEVINE: I don't think we normally have a
25 situation before the Board where that argument is
26 available to the taxpayer.
27 MS. MANDEL: Okay. But it -- okay.
28 It sounds like it might be available. It
24
1 sounds like that's what you're saying?
2 MR. LUOMA: That's exactly right. And not so
3 much just funds available, it's the unencumbered funds.
4 In the Decision and Recommendation the Appeals
5 attorney indicated -- read from -- quoted in the
6 Decision and Recommendation the flooring agreement about
7 the collateral that was required in order to have this
8 $13 million flooring arrangement. The lender takes a
9 security interest in all accounts, contract rights,
10 chattel paper, deposit accounts, instruments, letter of
11 credit rights and general intangibles, all machinery,
12 furniture, fixtures and other equipment of every type,
13 all proceeds of any above described personal property.
14 Now we talked about -- or Mr. Levine talked
15 about you can't encumber sales taxes. Well, that sounds
16 like you're imposing a trust. That's -- that's what a
17 trust is.
18 But, in any event, in this case, Mr. Bartel,
19 when he collected those sales taxes, after he came in on
20 December 7th, between December 7th and December 20th,
21 when he was there, he collected sales taxes on any
22 transaction that took place and he paid those taxes.
23 There were no unpaid taxes for the period after he
24 became a responsible person on December 7th.
25 All of the liabilities that were unpaid were
26 before he appeared. And everything that came in,
27 according to the Appeals attorney who wrote the Decision
28 and Recommendation, that -- that everything was locked
25
1 up because there were no unencumbered funds.
2 MS. MANDEL: Okay. Let me just ask the
3 original thing that Mr. Levine said. Who -- was
4 Mr. Bartel involved in the transaction with First
5 Hawaiian Bank in setting up the contract and the
6 flooring agreement and all that?
7 MR. GOLOMB: Mr. Bartel, at the Appeals
8 conference, explained to the staff counsel when they
9 renewed the agreement in October 2006, you know, they
10 increased the line of credit from 11 million to 13
11 million, the paperwork had to be resigned. And he
12 indicated that his signature was forged on one of those
13 documents or several of those documents.
14 In fact, Mr. Bartel is sitting in the audience
15 and, if necessary, I can have him come up and he can
16 explain that further.
17 But when the -- you know, the flooring
18 agreement was increased, Mr. Kraut or someone at his
19 direction, forged Mr. Bartel's name to the paperwork.
20 MR. LEVINE: If I may just add?
21 We've covered this in -- in prior things. We
22 expect -- when there's a flooring agreement, no matter
23 how massive the encumbrance, the bank expects the
24 company to stay in business and pay bills. So, the bank
25 doesn't come in and say, "You can't pay your bills,"
26 because the bank knows that the company is going to go
27 out of business. And we expect the responsible person
28 to make good faith efforts to get the tax paid, which
26
1 means asking the bank for permission to pay. And you've
2 had at least one case where we recommended granting
3 where we found that the responsible person -- that the
4 funds were encumbered and the -- the creditor was in
5 control of everything. And the responsible person
6 established to our satisfaction that he had made a good
7 faith effort to ask -- to tell them it was due, to ask
8 for permission to pay it and it was refused and we
9 accepted that. So, that's the type of standard we've
10 imposed --
11 MS. MANDEL: Okay.
12 MR. LEVINE: -- for us to recommend.
13 MS. MANDEL: Leaving aside what funds were
14 available on the 6th or 7th of December, you would say
15 that -- that -- that for the prepayment that was due at
16 the end of December, at those times when they're sending
17 in a nonremittance something or other, they should have
18 said, "Let me pay this money."?
19 MR. LEVINE: Yes.
20 MS. MANDEL: And if there were -- and there's
21 not necessarily an indication that over that December
22 6th to December 20th there wasn't -- what the funds
23 coming in.
24 So, that's -- that then becomes the key in
25 Appeals' mind, whether they asked when they had to file?
26 MR. LEVINE: They asked and the bank had the
27 power to refuse and did refuse, then, yes, that would be
28 critical.
27
1 MS. MANDEL: We haven't -- we haven't heard
2 information on that?
3 MR. GOLOMB: I could have Mr. Bartel, who's
4 sitting in the audience, come up and address that. He
5 and I spoke about that. He indicated to me very clearly
6 that he was not at liberty to pay anybody he wished to
7 pay.
8 MR. HANKS: Ms. Mandel, if I could add a
9 comment too that's pertinent to this discussion?
10 It appears as though Mr. Bartel admitted that
11 there was an inventory valuation of approximately 2 and
12 a half million dollars in vehicle property when he came
13 on the scene in early December, December 3rd of 2010 was
14 the date of his letter acknowledging that.
15 Now, at the end of the month, at the end of
16 December of 2007, the Certified Public Accountant valued
17 that inventory at approximately $1.3 million. So, the
18 difference in those two figures is approximately
19 $1.1 million. So, it indicated at least $1.1 million
20 worth of vehicle inventory was sold in that -- that
21 single month's period.
22 So, we know that at least that volume of sales
23 occurred in the month where Mr. Bartel was on the scene.
24 The second comment that I note is that we have
25 a copy of the flooring agreement that's dated August 1
26 of 2007 and which is signed by Petitioner, or allegedly
27 signed by Petitioner. The agreement contains his name.
28 We don't know if it was forged, you know, by another
28
1 individual, but Mr. Bartel's --
2 MS. MANDEL: But --
3 MR. HANKS: -- name appears on that.
4 MS. MANDEL: -- there were other forgeries,
5 which is part of why Appeals was there.
6 MR. HANKS: Correct, correct.
7 MS. STEEL: What was the date?
8 MR. HANKS: So, that was dated August 1st of
9 2007.
10 MS. STEEL: Okay.
11 MR. HORTON: Member Steel.
12 MS. STEEL: For the -- when escrow was closed?
13 MR. LUOMA: When?
14 MS. STEEL: Uh-huh.
15 MR. LUOMA: That was in April.
16 MR. BARTEL: No, that was March, approximately
17 March 20th.
18 MS. STEEL: Okay. So, escrow company sent
19 directly money to BOE and you didn't know where it was
20 applied?
21 MR. BARTEL: Correct.
22 MS. STEEL: And then when you find out, then
23 you ask BOE to transfer that to fourth quarter instead
24 of third quarter?
25 MR. BARTEL: Yes, when I found out.
26 MS. STEEL: Okay. To the Department that, you
27 know, when this taxpayer asked that, you know, money
28 gets in from escrow company, so, it was not from the
29
1 from the taxpayer himself and then asked -- taxpayer
2 asked to transfer that, apply to fourth quarter. So,
3 BOE did that and then went back to third quarter. Why
4 is that?
5 Because that was the request and if this
6 taxpayer knew that money was going in and then, you
7 know, applied at that point, if taxpayer was doing by
8 himself, you know, understandable. But it was coming
9 from the escrow. So, he tried to correct that, so,
10 asked BOE to apply it on fourth quarter. So, we did
11 that by taxpayer's request.
12 But you redid it and to third quarter, why is
13 that?
14 MR. KWEE: Yes, just to clarify. At the time
15 that we received the payment, the $200,000 payment was
16 negotiated by all parties and it was specified to cover
17 the AR, account receivable, the AR balance for the sales
18 tax but it didn't specify between the two quarters. So,
19 the Department applied it, consistent with our published
20 CCPM guidance, to the third quarter of 2007.
21 And it wasn't until more than three years later
22 after, the Decision and Recommendation came out stating
23 that -- deciding that Petitioner wasn't responsible for
24 the third quarter of '07 and that's when Petitioner
25 first sent in a request to the Return Analysis Section
26 asking that the payment be reapplied to a different
27 quarter. And he had stated that this payment went --
28 had initially been applied incorrectly and was applied
30
1 without his consent or without asking -- without asking
2 for it -- clarify -- correction from the taxpayer.
3 But, basically, now more than three years have
4 passed. To reapply the payment now would be after the
5 close of the statute of limitations period with respect
6 to the underlying liability. And with respect to the
7 period, the payment at issue, we don't believe that
8 under these facts that the payment should be reapplied
9 because it was applied correctly at the outset, with our
10 -- consistent with our policies.
11 MR. HANKS: Ms. Steel, also if I could also
12 elaborate on that?
13 I know Mr. Golomb had indicated that the
14 Department frequently moves payments when there is -- is
15 a specific request, taxpayer request, that a payment be
16 directed toward a particular liability, an amount, be it
17 tax, interest or a penalty, then, of course, we'll abide
18 by those instructions.
19 In this case we didn't have any specific
20 instructions relating to how that amount should be
21 applied. Now IRIS rules that are written at the time
22 applied the amount to the oldest liability. And that's
23 consistent, actually, with -- with collectors
24 receiving -- receiving payments for as long as I've been
25 around.
26 Typically the payments, if they are not
27 directed by -- by the taxpayer, ordinarily those amounts
28 are applied against tax and the oldest tax. So, it
31
1 reduces any further accrual of interest on old tax
2 liabilities.
3 MS. STEEL: But you're not answering my
4 question, though, because Department already transferred
5 back to fourth quarter, applied it and then brought it
6 back, right?
7 MR. HANKS: It did that within a period of
8 three days when our Return Analysis Section was asked by
9 the taxpayer --
10 MS. STEEL: Mr. Tucker has an answer.
11 MR. HANKS: -- to redirect -- redirect the
12 payment.
13 MS. STEEL: He seems really excited.
14 MR. TUCKER: No, I --
15 MS. STEEL: Your face there that --
16 MR. TUCKER: -- I'm sorry, I was just going to
17 give you a timeline, just so you can have an idea and
18 maybe that will help just lay these things out.
19 We have a liability that was established, a
20 6829 liability that was established on December 3rd,
21 2009. The D & R was -- let's step back a second.
22 The payment was first applied on March 18th in
23 2008. And that was to pay against the previous
24 liability. About a year later, on December 3rd, 2009,
25 we have a 6829 liability that was established.
26 Thereafter, on -- I think it was February 28th, 2011,
27 the D & R comes out. And at the time that the liability
28 was established, it was for third quarter and fourth
32
1 quarter. In the D & R they said, you are no longer
2 liable for the third quarter.
3 And it was only about a month after the D & R
4 came out that they said, in essence, since we're no
5 longer liable for the third quarter, apply that payment
6 to the fourth quarter.
7 So, it wasn't brought up prior to that point.
8 It -- when the billing was received, there was no
9 mention of applying it to the different period. It was
10 only after the individual's no longer liable for the
11 liability in the third quarter that it was then asked
12 that it was -- be moved.
13 And here's what I -- staff moved it on
14 April 1st, 2011 and then realized they'd made a mistake
15 and corrected it on April 4th, 2011.
16 MS. STEEL: That really bothers me, though,
17 because it was transferred by the taxpayer's request.
18 It really doesn't matter, two days or three days, but,
19 you know, that really bothers me.
20 Mr. Levine, can you tell me about this when
21 escrow was ready to close that there's a negotiation
22 done for $200,000. What exactly happened for
23 successor's liabilities here?
24 It seems like when we did the negotiations, it
25 cannot be waived all of them? Why we are not going
26 after the people who do business after that, then why we
27 stick this with the officers here, especially for this
28 taxpayer didn't do the business for few years?
33
1 MR. LEVINE: Well, again, this person was part
2 of the business that -- that incurred the liability and
3 I believe --
4 MS. STEEL: Only for the fourth quarter because
5 he came back on December 7th --
6 MR. LEVINE: Okay.
7 MS. STEEL: -- that he found out that his
8 partner was cheating him.
9 MR. LEVINE: Right.
10 MS. STEEL: Yeah.
11 MR. LEVINE: And that's the only liability
12 left. And as between him and the successor, I know my
13 view would be you'd go after the 6829 person, but as far
14 as the successor liability in the certificate, it was a
15 collection decision that the Department made.
16 I don't know the facts, but I can tell you, I
17 think I can get right on that the Department decided
18 that if they don't accept the 200,000 and get the
19 certificate, that no money would be paid and the
20 business wouldn't continue making sales subject to sales
21 tax. --
22 And the Department decided to settle for what
23 it could get and keep the business operating under
24 different ownership. That's my best guess.
25 MS. STEEL: So, when you get the $200,000 --
26 MR. LEVINE: And I don't think --
27 MS. STEEL: -- after negotiation, isn't that
28 the tax liability is done deal or --
34
1 MR. LEVINE: -- that's -- only relates to the
2 successor's liability. The Department --
3 MS. STEEL: -- portion?
4 MR. LEVINE: -- basically, let the successor
5 off the hook for that amount of pay down of the tax --
6 MS. STEEL: So, after October, we can go after
7 whoever?
8 MR. LEVINE: Whoever else is liable, which, of
9 course, is Tracy Chevrolet, to extent that that would be
10 the No. 1 choice and then any responsible person.
11 MS. STEEL: Okay. Let me ask taxpayer just one
12 thing, that when you came in on December 7th, that bank,
13 Hawaiian -- that whatever bank here -- First Hawaiian
14 Bank, you said that you didn't have any control over the
15 what to pay, what not to pay. That -- what kind of
16 control that they had?
17 I mean I totally understand because this
18 company owed 13 -- over $13 million, I know that bank
19 is -- you know, wants to control that. How much control
20 did they have?
21 MR. BARTEL: Well, their desire was to see the
22 sale through more from the standpoint of not -- not what
23 they would get out of the sale of the business or the
24 franchise, but more that they could sell the existing
25 vehicles that were inventory to the next dealer. So,
26 that was the motivation of the bank to allow the
27 business to continue, even in the cursory manner that it
28 was. And it was -- obviously, you know, it had a
35
1 negative net worth of over $10 million.
2 I did want to just address one thing that I
3 think was a little confusing, perhaps, and that's about
4 the number of invent -- of vehicles that were sold
5 between the time I got there in December and early
6 January.
7 What -- whatever vehicles were sold were, for
8 the most part, owned by -- not for the most part, almost
9 all were owned by First Hawaiian Bank under a security
10 agreement. In other words, a flooring agreement. They
11 had a lien on everything. And a lot of the vehicles
12 that were sold to reduce -- which they wanted the
13 inventory reduced as much as possible -- and the
14 business wholesaled them, in essence, sold them from one
15 dealer to another, not a taxable event.
16 MS. STEEL: So, when First --
17 MR. BARTEL: And that's the money that they're
18 referring to came through the business.
19 MS. STEEL: -- okay, when First Hawaiian Bank
20 took over and then when they told you that don't pay
21 tax, but pay this, and how much control that they had?
22 I didn't get that answer from you.
23 MR. BARTEL: They didn't say -- they didn't
24 tell me not to pay tax. They said, "Pay the things that
25 it takes to get this thing to close." Because if they
26 turn off the lights, I think it's more than 72 hours,
27 the franchise then reverts back to the manufacturer.
28 So, they wanted to keep the lights on, which virtually
36
1 all -- was all that was happening.
2 So, there -- yes, there was rent paid and there
3 was lights paid, heat.
4 MS. STEEL: Okay. Just last question to
5 Franchise Tax Board, when you decide to go after
6 officers instead of successor's liability that, you
7 know, for other than $200,000 the negotiation was done,
8 what was the reason here?
9 Because they are keeping the business. They
10 going to run the business. There is money out there
11 that somebody who continuing the business with the same
12 name. So, I see a lot of cases like this then we are
13 really going after successor's liabilities. So, they
14 have to close down. Actually, I saw a couple of stores,
15 that, you know, flower shop, they had to close down.
16 So, why -- why is that? Do you know?
17 MR. HANKS: I think Mr. Levine answered --
18 answered the question much like we would. I think that
19 there was a meeting of minds between the parties that
20 that $200,000 was -- was the amount that was negotiated
21 that was sufficient to allow a security clearance, a tax
22 clearance, to be issued in that case. Because we want
23 the business to continue as well.
24 But we're mindful of the outstanding tax
25 liability that's owed. I think from our perspective
26 we're looking at the State's interest as well as the
27 business owner's interest, the successor as well as the
28 primary operators.
37
1 But I think we're also mindful that -- that the
2 majority of of the taxes are being collected, were
3 tax -- were collected by the individuals that we're
4 seeing today and by their predecessors, the other -- the
5 other individuals that ran the business. They were
6 collecting the the sales tax reimbursement when they
7 were selling their -- their vehicles. So, we were
8 looking at them as primarily responsible for -- for
9 payment of -- of that sales tax.
10 And that's why we're looking at the responsible
11 person liability primarily.
12 MS. STEEL: Okay. Can I ask just one thing?
13 Have you ever seen anything that it was -- negotiation
14 was done during the escrow and then whatever tax money
15 was -- the tax measure was there, if it was, for
16 example, $500,000 but you could -- BOE couldn't collect
17 more than $200,000, but we waived the rest of it. Did
18 we have those cases?
19 MR. HANKS: I think probably every case is
20 going to be looked at in a unique way. I think if we
21 look at it and determine that those are the only funds
22 available and not --
23 MS. STEEL: Then you can be happy, that's what
24 I'm asking. Because this is really odd that I'm looking
25 at this case.
26 MR. HANKS: Right. I think that we're probably
27 looking at -- at this case from the standpoint of
28 what -- what is going to really benefit the State of
38
1 California, you know, in this instance?
2 What are the available funds that we can
3 collect through escrow? And I think what -- what we
4 determined was that we could safely collect $200,000,
5 apparently nothing the excess of that, but then issue
6 the tax clearance, allow the successor operation to
7 hopefully continue.
8 But, hopefully, assist our taxpayer as well in
9 paying a portion, anyway, a large portion of the tax
10 liability that was -- that was owed to Board of
11 Equalization.
12 MS. STEEL: Thank you.
13 MR. HORTON: Mr. Runner.
14 MR. RUNNER: Yeah, just a couple of
15 clarifying -- to clarify it just bit.
16 In the relationship between the bank and their
17 involvement then with the decisions that were made as to
18 what would get paid, I'm trying -- what you had said was
19 they expected the things to get paid that would keep the
20 doors open through the -- through the escrow. Is that
21 basically what I heard you say?
22 MR. BARTEL: Yes.
23 MR. RUNNER: Okay. What would have happened if
24 you would have paid the sales tax?
25 MR. BARTEL: There wasn't enough money to pay
26 the sales tax.
27 MR. RUNNER: The bank account did not have
28 enough money in it to pay the sales tax?
39
1 MR. BARTEL: That is correct.
2 MR. RUNNER: Okay.
3 MR. BARTEL: And every check that came in was
4 looked at by the First Hawaiian Bank to make sure that
5 if it was a check for a vehicle that they had floored,
6 they took that check or they made -- you know, put it
7 into the bank and made us immediately write a check to
8 make sure that we weren't continuing to sell out of
9 trust -- which is the term for selling vehicles that
10 they have advanced monies on, whether it be new or --
11 MR. RUNNER: Did you have any conversation with
12 the -- with the bank, saying, "Hey, look we've got this
13 tax liability. This is money that Californians have
14 given to pay the State of California."?
15 I mean what -- did they --
16 MR. BARTEL: I had lunch --
17 MR. RUNNER: -- was that a conversation you
18 ever had?
19 MR. BARTEL: -- I had lunch practically every
20 day with the -- with the bank officers.
21 MR. RUNNER: Uh-huh. And they -- they were
22 well aware of the tax liability that was due?
23 MR. BARTEL: I think they were well aware of
24 the tax liability that was due, yes.
25 MR. RUNNER: And they were choosing then to
26 make sure that they were able to receive the money off
27 the sale of that flooring rather than the obligation to
28 the State?
40
1 MR. BARTEL: That's correct. I had not
2 operated that dealership for over ten years. So, if you
3 think of the dynamic --
4 MR. RUNNER: Uh-huh.
5 MR. BARTEL: -- of coming into a situation
6 where your partner has -- has defrauded a bank that
7 you've signed on the paperwork, you know, for an amount
8 of money over $10 million, knowing at the end of the day
9 that that bank is going to want that money.
10 MR. RUNNER: Let me ask you this, at what point
11 did you find out that -- when did you find out that you
12 had -- that the -- that the BOE had identified you as a
13 responsible party?
14 MR. BARTEL: December of 2008.
15 MR. RUNNER: And when did you ask -- what was
16 the date of the request for that escrow payment to be
17 made -- to be credited during the time in which you did
18 have the the control?
19 MR. BARTEL: I would -- sometime in 2011.
20 MR. RUNNER: Why wouldn't you have asked when
21 you found out you were going to be a responsible party
22 for this tax, for that -- for -- for those escrow
23 dollars to be applied in order to kind of get you off
24 the hook?
25 MR. BARTEL: I never realized what quarter it
26 was applied to until then.
27 MR. RUNNER: 'Til -- 'til --
28 MR. BARTEL: "Til 2011.
41
1 MR. RUNNER: But you knew you were a
2 responsible party back in 2008?
3 MR. BARTEL: Well, I knew that I was a
4 responsible party for the third and fourth quarter.
5 MR. RUNNER: Okay.
6 MR. BARTEL: Or at least -- yeah, for all of
7 the sales tax that was left owing.
8 MR. RUNNER: But at that point you didn't think
9 that the best way to kind of clear your issue would be
10 to help direct that money back at that time to the
11 quarter to which --
12 MR. BARTEL: To be honest with you, I didn't
13 know that I had the ability to direct it one way or the
14 other. I had no guidance in that area.
15 MR. RUNNER: Okay. Let me -- back to the
16 question with regard to the sales that were made during
17 that a one month.
18 The implication I got is that there were sales
19 going on and taxes not paid. Is that -- that's not --
20 that's not -- that's not what I'm hearing from -- from
21 the -- from the taxpayer.
22 He's saying that the sales were made that were
23 tax exempt sales, they were made selling flooring from
24 one dealership to another, is that not our
25 understanding?
26 MR. HANKS: No, I think what the -- the
27 Petitioner is saying is that there were certain flooring
28 obligations that needed to be paid. So, as soon as he
42
1 sold -- let's say he purchased a car for $19,000 and
2 sold it for $20,000 and then he collected sales tax
3 reimbursement of $1600 on that transaction. What he's
4 saying is that when that vehicle was sold there was a
5 reasonable expectation that the bank was -- was going to
6 be paid the $19,000 that they had extended to him to
7 acquire that automobile.
8 But I think what we're saying is that -- that
9 that's definitely the case and that's how flooring
10 arrangements work. But there are additional funds, the
11 $1600 in sales tax collection that took place in this
12 case --
13 MS. MANDEL: And that's the money that they're
14 saying they paid.
15 MR. HANKS: Right.
16 MS. MANDEL: Anything sold once he walked back
17 into the business or the sales tax, they're saying they
18 paid that sales tax.
19 So, in your example, it would be the spare
20 $1,000, if all Hawaiian Bank needed to get was exactly
21 19?
22 MR. HANKS: Correct. What -- what we're saying
23 is that -- is that they would be obligated to pay that
24 $1,600.
25 MR. RUNNER: But apparently -- I think -- I
26 think what I've heard them say is that they paid all
27 sales tax due for that -- for that month.
28 Is that --
43
1 MR. LUOMA: That is correct.
2 MR. RUNNER: And then we don't believe they
3 did?
4 MR. HANKS: There was a deficiency remaining
5 after that fourth quarter return.
6 MS. MANDEL: Right, because December 6th
7 through December 20th is not the entire fourth
8 quarter.
9 MR. RUNNER: Right. So, the deficiency would
10 have been -- the deficiency would have been not -- would
11 be prior to the December of when he took over the
12 business, not while he had the business.
13 Is that -- is that -- let me ask the taxpayer,
14 is that -- is that -- my understanding of what I'm
15 hearing.
16 MR. BARTEL: That's absolutely correct.
17 And if I can just clarify one thing further?
18 You're talking about a business that runs -- you know,
19 that runs through 250,000 a month.
20 In order for the State Board -- in order for me
21 to have closed the sale on the -- on the 20th or the
22 18th of March and to have that escrow pay out to the
23 State Board the 200,000 that it did, or an amount that
24 the State Board had negotiated with -- with -- with
25 First Hawaiian Bank for more, if it had been more, in
26 order for me to do that, I needed that $1600 to pay
27 heat, light and power and some rent and a few salaries
28 until that point in time.
44
1 MR. RUNNER: Let me just follow up on one other
2 item.
3 MR. HORTON: Mr. Runner, if I -- if I may
4 just -- I just want to clear up some confusion that --
5 that I'm having --
6 MR. RUNNER: Go ahead.
7 MR. HORTON: -- and some inconsistencies in the
8 question, if I may?
9 MR. RUNNER: Go ahead.
10 MR. HORTON: The taxpayer just testified that
11 he actually used the 1600 to pay heat and other things
12 in order to keep the facility open.
13 We had earlier testimony that there was no
14 sales tax collected and whatever was collected was
15 actually reported.
16 And I have yet to hear from the Department
17 whether or not they believe that to be true based on
18 their records.
19 I mean, when you refer to 1600, that's the
20 amount of the sales tax?
21 MR. BARTEL: I did pay all the sales tax due. I
22 meant if there was any profit.
23 I didn't collect sales tax that I didn't pay
24 during the time that I was --
25 MR. HORTON: Okay, all right, I just wanted to
26 make sure.
27 MR. BARTEL: Okay, I want to make that very
28 clear.
45
1 MR. RUNNER: Okay. Let may just -- just for my
2 own information kind of get an idea when it is that we
3 were -- we were involved with that negotiation in terms
4 of the escrow and how much money then would be able to
5 be applied then to a -- to a sales tax deficit?
6 Is that --
7 MR. BARTEL: We must have been if we got a
8 clearance.
9 MR. RUNNER: Okay and we -- right, we -- and,
10 so, at that point, help me understand how that works.
11 So -- so, we have -- we have -- we have a
12 collector that's engaged in that part of the
13 negotiation, they're making a decision, they're looking
14 at that -- at the sale and they're kind of deciding
15 who -- whether or not this is -- if we go for the
16 full -- full 400, we're going -- the sale's going to go
17 down or we're going to lose the business.
18 How does that -- who -- who -- who does that?
19 Do we have people who do that and have the ability to
20 look at the sale good enough to determine what the --
21 what the -- kind of that breaking point is for the sale
22 and when the sale goes south and -- I just wonder how we
23 come up with 200,000 on the liabilities.
24 MR. BARTEL: 400.
25 MR. TUCKER: I'll just say, my understanding is
26 this would be highly unusual.
27 Mr. Hanks would know for sure or he would know
28 better, but, typically, we look just to see what's the
46
1 amount of the outstanding liability.
2 But in this circumstance this sounds like this
3 was highly unusual, so --
4 MR. RUNNER: I guess what confuses me a little,
5 not only did we -- not only did we decide on the number,
6 but then we decided also then as to how we were going to
7 kind of collect the rest of it through -- through some
8 kind of responsible person party process.
9 I mean, is that the -- is that the thinking
10 that went on, well, we'll get our 200,000 here, we'll
11 get the balance through a responsible party?
12 MS. HANKS: No.
13 MR. TUCKER: I would find --
14 MR. RUNNER: No?
15 MR. TUCKER: -- I don't think so, Mr. Runner.
16 It's -- typically they would look to the
17 successor and the predecessor.
18 MR. RUNNER: Okay.
19 MR. TUCKER: And here we're looking to collect,
20 we're -- we have circumstances in which Rev. and Tax
21 Code allows us to collect from the successor unless they
22 the tax is either paid or they receive a clearance from
23 the Board of Equalization.
24 MR. RUNNER: Right, right.
25 MR. TUCKER: They a file and request that
26 clearance.
27 My -- I can only imagine they would expect to
28 collect that from the predecessor. I do not believe
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1 they would have thought we would collect this from a
2 responsible person.
3 There would have been no investigation. There
4 would have been nothing done at that time to even know
5 that -- who that responsible person might be.
6 MR. RUNNER: So, they thought they'd go ahead
7 and get 200 in escrow and then go after --
8 MR. TUCKER: Tracy Chevrolet --
9 MR. RUNNER: -- Tracy Chevrolet.
10 MR. TUCKER: -- for the balance.
11 MR. RUNNER: -- for the balance?
12 And that would have been -- what was this value
13 of the sale?
14 MR. BARTEL: 870,000 total.
15 MR. RUNNER: Okay. I just think it's kind of
16 -- I'm trying to get my arms around the idea that we've
17 got negotiators out there deciding how much money we're
18 going to get here and then we're going go after somebody
19 else later on, you know, whether it's a predecessor or
20 whatever, as opposed what I -- what I would think would
21 happen is, hey, we have a $400,000 liability, looks the
22 best we're going to get out of this 200. We're done,
23 you know, and -- as opposed to just trying to figure out
24 what the back door way is to get more.
25 MR. HANKS: Mr. Runner, I don't have the
26 details regarding those conversations, but, of course,
27 what Mr. Tucker is describing is absolutely accurate.
28 And these conversations are going to to be rolled back
48
1 in time. We're not going to be considering personal
2 6829 liability. We're actively engaged in
3 communications with that corporation.
4 And, so, we're talking to them about
5 installment payment agreements, about what's reasonable,
6 what can they afford to pay to the Board.
7 And, so, we would have had those types of
8 discussions with the taxpayer.
9 MR. RUNNER: It would have been this taxpayer,
10 right?
11 MR. HANKS: Absolutely.
12 MR. RUNNER: So, this --
13 MR. HANKS: Or --
14 MR. RUNNER: -- so, we're having this
15 negotiation with this taxpayer?
16 MR. KWEE: Yes. There were --
17 MR. RUNNER: And then -- and I would assume
18 that then this taxpayer is thinking this is all getting
19 wound up together and this is what the liability is and
20 this is how it's going to be paid.
21 And then, all of a sudden, we come back and
22 say, "Oh, by the way, there's some more."
23 I mean, I'm wondering if the taxpayer realized
24 if, indeed, he was going to be hit with another 200,000
25 if he would have said, "Hey, let's re-negotiate this
26 sale a little differently."
27 I don't know. I think I would have.
28 MR. BARTEL: I absolutely would have, had I
49
1 been given that opportunity. I absolutely would have.
2 MR. RUNNER: And, so, I'm just thinking that,
3 you know, here he is negotiating the sale, you're
4 already dealing with him. He thinks this is all going
5 to be taken care of because the sale has been okayed and
6 the buyer has now gotten this certificate and is never
7 told in the process, kind of like, "We may be coming
8 after you after -- when this is all done."
9 MR. HANKS: I don't know when that conversation
10 would have taken place, but -- but our --
11 MR. RUNNER: Should it have been? Should it --
12 MR. HANKS: -- our collectors would probably
13 advise the taxpayer, yes, that that's --
14 MR. RUNNER: You think -- I mean, I would
15 assume --
16 MR. HANKS: -- a possibility.
17 MR. RUNNER: Yeah, I would assume we should
18 have had that conversation with the taxpayer --
19 MR. HANKS: Yes.
20 MR. RUNNER: -- and say, "Hey, look, here's how
21 we can do this. We can do this by you going ahead and
22 getting $200,000 here and then we're going to have to
23 come back and find the rest of the money somewhere. It
24 may or may not be you, but we're going to find
25 somebody," so that he knows whether or not if it's him
26 he would negotiate a different deal at that point so
27 that doesn't have this future liability hanging over his
28 head.
50
1 I mean, I -- I mean, I'm kind of putting myself
2 in the taxpayer's feet here as a business person, but am
3 I -- am I off base on that?
4 MR. BARTEL: You're totally accurate.
5 MR. RUNNER: Okay, thank you.
6 MR. HORTON: Okay. Couple of questions of the
7 taxpayer.
8 Am I correct that you -- you negotiate -- you
9 helped negotiate the sale?
10 MR. BARTEL: Yes, I did.
11 MR. HORTON: And at the time you negotiated the
12 sale were you aware of the tax liability?
13 MR. BARTEL: Yes, I was.
14 MR. HORTON: And during the negotiations did
15 you advise the parties to pay the tax liability -- that
16 they should consider paying the tax liability?
17 MR. BARTEL: I told my attorney certainly that
18 this tax liability existed.
19 MR. HORTON: So, do you feel you exercised good
20 faith in trying to assure that the tax liability was
21 paid?
22 MR. BARTEL: I think I did everything within my
23 power to get as much money for all concerned as I
24 possibly could, sir.
25 MR. HORTON: During the period subsequent to
26 this, did -- were there any taxable transactions?
27 MR. BARTEL: Subsequent to?
28 MR. HORTON: When you start operating the
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1 business and you had the -- subsequent to the flooring
2 agreement?
3 MS. MANDEL: I think they sold the business.
4 MR. HORTON: It was sold?
5 MR. BARTEL: Yeah, the business was sold in
6 March of --
7 MR. HORTON: During the time that you were
8 considered a responsible person, did you receive any
9 compensation?
10 MR. BARTEL: No, sir.
11 MR. HORTON: Okay.
12 MR. RUNNER: Let me just -- one quick -- real
13 quick, did you assume that you were in a negotiation of
14 settlement with the BOE through this negotiation?
15 MR. BARTEL: Yes, sir.
16 MR. RUNNER: Thank you.
17 MR. HORTON: What caused that assumption?
18 MR. BARTEL: Because that's what I was --
19 that's the indication that I got from my attorney.
20 MR. HORTON: Okay. Thank you.
21 Is there a motion? Further discussion,
22 Members? My apologies.
23 Is there a motion?
24 Moved by Member Yee to take the matter under
25 submission, second by Mr. Runner. Without objection,
26 such will be the order.
27 Thank you very much for appearing before us.
28 The Board will take your matter under consideration
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1 later on this evening and send you a written report of
2 our decision.
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1 REPORTER'S CERTIFICATE.
2
3 State of California )
4 ) ss
5 County of Sacramento )
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7 I, JULI PRICE JACKSON, Hearing Reporter for the
8 California State Board of Equalization certify that on
9 MARCH 20, 2012 I recorded verbatim, in shorthand, to the
10 best of my ability, the proceedings in the
11 above-entitled hearing; that I transcribed the shorthand
12 writing into typewriting; and that the preceding pages 1
13 through 53 constitute a complete and accurate
14 transcription of the shorthand writing.
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16 Dated: May 10, 2012
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19 ____________________________
20 JULI PRICE JACKSON
21 Hearing Reporter
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